By announcing new guidelines for the expansion of foreign banks’ operations in India, the RBI has prepared the stage for an Indian avatar of foreign banks.

Indian operations being highly remunerative for foreign banks, more branches are likely to appear on India’s banking map.

Promotion of wholly - owned subsidiaries would be the preferred format for foreign banks to expand their presence in India. While under the WTO agreement, only 12 branches are permitted to be opened annually by foreign banks in India, the subsidiary banks can open more branches with the regulator’s concurrence.

Some foreign banks have ventured into a few places outside the metros and state capitals. But, they walk out if they find that the business is unremunerative. A case in point is ABN Amro. It came to Mangalore in 2006, soon became a part of Royal Bank of Scotland and in August 2013, it closed the branch. In India domestic banks rarely close branches, even if the business prospects are not bright. Mangalore is incidentally ranked 36th among the top 100 banking centres.

More liberal climate

Foreign banks are now expected to promote wholly - owned subsidiaries in India, with an initial capital of Rs.500 crore. The RBI is aiming to pursue a common code for regulating the banking business of both domestic and foreign banks. Local branches of foreign banks have to align their operations in tune with domestic banks, which are called upon to take up the responsibilities like extending credit to priority sectors and to reach out to the unreached through programme of financial inclusion. The new guidelines also seek to insulate the Indian operations of foreign banks from any adverse developments in the banking sector in their own countries. As an incentive for promoting subsidiaries, foreign banks are exempted from capital gains tax, when they convert their Indian branches into branches of the subsidiary banks.

Foreign banks operating in India before August 2010 would be allowed to continue, without being compelled to opt for promoting wholly-owned subsidiaries. Foreign banks’ subsidiaries would not be allowed to own more than 74 per cent of the capital of domestic private sector banks, which they may acquire. “The wholly-owned subsidiaries will be given near national treatment which will enable them to open branches anywhere in the country,” according to the Reserve Bank guidelines. They would be required to extend credit facilities to priority sectors like the domestic banks. At present, the credit pattern of foreign banks being different from that of Indian banks, their return on advances corrected for the cost of funds is 5.50 per cent as on March 2013. It is much lower for public sector banks, which take the full load of priority sector advances and have large number of small loans, extended at 3.81 per cent.

Corporate governance

For ensuring better corporate governance of their business in India, the new banks should not have less than two-thirds of directors to be non-executive directors. At least one-third of the directors should be independent of the management of the subsidiary in India, its parent bank or associates. More particularly, not less than fifty per cent of the directors should be Indian nationals either non-resident Indians or persons of Indian origin subject to the condition that not less than a third of the directors are Indian nationals resident in India.

With a view to safeguarding the interest of domestic banks, the RBI guidelines stipulate: “to prevent domination by foreign banks, restrictions would be placed on further entry of new wholly- owned subsidiaries of foreign banks/ capital infusion, when the capital and reserves of the WOSs and foreign bank branches in India exceed 20 per cent of the capital and reserves of the banking system.”

A couple of foreign banks having fairly large branch network in India, appear to be not interested in promoting subsidiaries in India. It is not desirable to allow such banks to function in isolation, catering to only a privileged class of customers located in metropolitan cities. They may be given a time limit, by which time they have to fall in line with other banks of foreign origin.

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